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In the complex landscape of economic systems, the framework of institutional complementarities may be considered as a key factor in shaping the effectiveness of policymaking. While this idea might not currently hold a prominent position in mainstream media discussions, it reportedly influenced, leader of the Opposition between 2010 and 2015, Ed Milleband’s plans to transform Britain’s economy. The plans intended to convert from a liberal economy where economic hierarchies (e.g. large influential firms, MNCs) and competitive market arrangements coordinate the activities of businesses, into a coordinated market economy where non-market relationships like collective bargaining, long-term partnerships, and mutual agreements between businesses, labour unions, and government entities coordinate business activities.
Hall and Soskice’s Varieties of Capitalism Theory illustrates how institutional complementarities lead to the emergence of distinct production systems. These systems, characterized by specific skills, investment strategies, and coordination mechanisms, highlight the interdependence of institutions in shaping economic outcomes. (Whilst Hall and Soskice’s focus on developed Western nations, this framework has also been expanded to emerging economies like Hierarchical in Latin America and Southeast Asia, Dependent in Eastern Europe, Segmented in Middle East)
In ‘Liberal market economies’ (e.g. US, UK):
- There is collective bargaining on a company level. This is where industrial relations issues are solved through negotiations in company-level which often leads to more worker inequalities.
- Most of the training and development initiatives at various levels are directed at developing general skills.
- Most decision-making power is held and exercised by shareholders of the company. A majority of the shareholders of the company are guided by their preference for immediate benefits in forms of dividends rather than long-term goals.
- There is less collaboration between firms.
In Institutional Complementaries:
- Labour relations are based on high levels of job mobility and firm-level wage-setting.
- There are training systems that provide general skills through formal education which are more efficient than collaborative training schemes that provide industry-specific skills. This is because workers who frequently shift jobs have strong incentives to acquire the general skills to allow the to switch jobs.
- Fluid capital markets facilitate the movement of funds from one endeavour to another, making it more efficient for firms to access technology by acquiring other enterprise, or to invest in assets that can be switched to other uses as market opportunities emerge, rather than to engage in long-term collaboration with other firms.
Advantages: Cost competition, reduced production costs, offers of goods and services at competitive prices and having the infrastructure for radical innovations.
Disadvantages: Less able to benefiting from specialist skills (as the competitive markets’ prioritisation of efficiency, cost reduction, and mass production focus often lead to standardized job roles), as well as, benefiting from incremental innovation.
In Coordinated market economies (e.g. Germany, Sweden):
- There is collective bargaining on a sector level. This sets wages and labour standards, regulations often reducing worker inequality.
- Industry-specific and company specific skills are more common.
- There is corporate governance decision making power of shareholders and the workforce (e.g. members of management appointed by the supervisory board).
- Greater collaboration between firms.
In Institutional Complementaries:
- Labour relations are based on strong unions and wage-bargaining makes it more efficient for firms to operate collaborative training schemes leading to high levels of industry-specific skills.
- As wages are often higher encourage workers to acquire industry-specific skills, and they make it more difficult for non-training firms to take workers by offering higher wages.
- Corporate governance tends to limit the demands on firms to maximize current profitability or shareholder value, which means that firms find it easier to enter collaborative arrangements with other firms, for the purposes of research, product development or technology transfer.
Advantages: Higher levels of specific skills, wage moderation, and taking advantage from long-term capital.
Disadvantages: Inability of companies to gain an increase their market share solely through cost reduction and gaining competitive edge through implementation of radical innovations.
Conclusion: The reason that these frameworks are significant is because it challenges the idea of a universal ‘one best way’ for institutional configurations, rejecting the notion that any combination of institutions is possible. Instead, it suggests that certain institutional forms, when combined, reinforce each other, contributing to the efficiency of specific combinations. Secondly, this framework suggests that despite the trend towards globalization, institutional differences persist among national economies. This diversity perhaps influences economic capacities, restrictions, and the ‘stickiness’ of institutions, challenging the idea of a one-size-fits-all approach to policymaking.
Image: Foreign Secretary James Cleverly attends G7 summit, Simon Dawson 2022 // CC BY 2.0 DEED
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